This chapter is from the book

Prior to the Industrial Revolution, business organizations were far smaller and simpler than they are today. Most businesses, such as family farms, merchant trading rooms, and artisan workshops, were owned and operated by a close-knit group of individuals who sold their goods and services to others within a local community. People specialized in a single trade or craft, exchanged their outputs with others who lived and worked nearby, and sought mainly to provide for family necessities. However, three key innovations that together characterized the Industrial Revolution shifted this model of economic behavior dramatically. The simultaneous emergence of mass manufacturing, long-distance communications, and mechanized transportation threw open the doors to larger and more geographically dispersed consumer markets, providing entrepreneurs who were able to scale up their operations the opportunity to vastly increase their wealth. Business leaders quickly grew their small shops into large, diversified organizations aimed at capturing new demand on national, and later international, markets. The sky was the limit.

To accommodate these revolutionary market shifts, businesses added assets, people, and capital, creating complex multifunctional organizations. Whereas before a few people performed all the tasks required of a business, now entire workgroups were formed to handle the various activities involved with purchasing raw materials, manufacturing and shipping goods, and selling products. The best thinking at the time, exemplified by Adam Smith’s widely read treatise on the division of labor, held that organizational performance was maximized by increasing specialization around different activities in the firm. Consistent with this logic, business leaders pushed different functional areas to focus on their particular part of the process, reasoning that by optimizing each set of activities in isolation they could maximize the performance of the organization as a whole. In short, the era of specialization was upon us. Moving from a scenario in which everyone did everything to one in which people specialized in different functional activities unleashed massive efficiency gains for early industrial organizations.

The problem is that the times have changed, but the thinking has not. The notion that if each division does its part to the very fullest, the entire organization is sure to succeed still dominates business thinking to this day. We find it in nearly every organization: sales should be the exclusive domain of the sales force; nobody but the accounting group needs to review or understand the financials; manufacturing should worry only about producing finished goods as efficiently as possible. Hire the best talent for each group and focus them on executing just those tasks assigned to their unit. The logic is simple but deeply flawed in today’s dynamic market environment.

Research by business scholars in the fields of operations, marketing, and supply chain management points to the conclusion that greater specialization is no longer the engine of growth it once was. Indeed, time and again over the past 30 years, researchers have found tremendous costs associated with the strict specialization paradigm. This “dark side” of overspecialization emerges (a) when activities and priorities in one area become disconnected from activities and priorities in other areas, and (b) when different functional areas lose visibility on the unique value they contribute to their end customer. The results are wasted resources, internal conflicts, and dissatisfied consumers.

Everyday examples abound. Take, for instance, the all too common practice of salespeople overstating their demand forecasts to ensure product is available for their customers. The result: increased inventories that tie up working capital. Salespeople might be happy, but chances are the enterprise as a whole suffers. Or consider the example of a firm’s operations group deciding to source low-cost components halfway around the world. Good for keeping costs down, maybe. But what happens when the firm needs to respond quickly to changes in the marketplace? The operations group may be optimizing on their goal of low unit cost production, but achieving that functional goal may not be in the best interest of the enterprise as a whole. The list of examples goes on. Yet an overemphasis on specialization persists, rooted in people’s tendencies to focus on the work at hand and management’s tendency to incentivize them on the same. Over time, attending to functional metrics creates the mindset that anything happening outside the business unit is an interference or potential threat. Managers’ willingness and ability to cross functional boundaries to maximize organizational performance disappears. And the efficiency gains produced by specialization are quickly outweighed by the loss in effectiveness produced by the disconnect among functions and with customers.

The point is this: if a company is going to succeed in today’s dynamic environment, specialization can be only part of the equation. All the parts of the organization that were originally segmented for the sake of efficiency have to be put back together in a way that maximizes customer outcomes and increases profitability. In short, the internal and external functions of a business must become integrated for the enterprise to stand a chance. But what does integration entail? The rest of this chapter aims at unpacking this sometimes ambiguous term and pointing the way toward achieving its benefits.

Integration and Supply Chain Management

Integration is at the core of supply chain management. Foundational research in business management had established that optimizing decisions locally within functional areas could—and most likely would—result in suboptimal outcomes for the organization as a whole. Scholars applied this insight in the fields of purchasing, manufacturing operations, and logistics management, spawning what today is recognized as the supply chain field. The centrality of integration is apparent in the earliest definitions of supply chain management, such as the one offered by Oliver and Webber.

[SCM] views the supply chain as a single entity rather than relegating fragmented responsibilities for various segments in the supply chain to functional areas such as purchasing, manufacturing, distribution, and sales...Supply chain management require[s] a new approach to systems: Integration, not simply interface, is the key.2

Likewise, highly influential frameworks offered by Cooper and Mentzer emphasize the importance of integration. Cooper, for example, defined SCM as the “integration of business processes” across key functional areas,3 whereas Mentzer saw SCM as “the systemic, strategic coordination of the traditional business functions and the tactics across these business functions.”4 More recent reviews of the literature have found that integration both within and across organizations is common to nearly all definitions of supply chain management. This emphasis on integration is also reflected in the practitioner community, where the Council of Supply Chain Management Professionals defines SCM as “an integrating function with primary responsibility for linking major business functions and business processes within and across companies.” Investigations into the ways in which integration could be exploited for competitive advantage have also played a significant role in supply chain research. The centrality of integration to supply chain management has even prompted some scholars to suggest it as the field’s defining concept.

Given its theoretical and practical importance, it is not surprising that integration has received a great deal of scholarly attention, with the majority of the research seeking to establish its performance benefits. Indeed, empirical evidence gathered over many years suggests that positive associations between integration and various types of business performance do exist. Anecdotal evidence from practitioners has validated these findings over time.

Yet, despite the importance of integration, researchers and practitioners continue to report that companies find it very difficult to achieve. Business practitioners are, if anything, more keenly aware than ever of the benefits of integration, but at the same time, they report that their ability to integrate across key functional areas has not improved meaningfully as knowledge about the subject has grown.5 This is plausibly due to conceptual issues regarding what scholars and practitioners mean when they use the term “cross-functional integration.”

Supply chain management researchers have adopted a variety of perspectives when defining integration and its dimensions. Some researchers have emphasized and studied singular aspects of integration, such as collaboration, interaction/communication, or coordination, whereas others have tried to combine more than one of these terms when conceptualizing integration, such as blending interaction/communication and collaboration, or communication and coordination, within a single concept. Still others have used the term integration without specifying integration’s “ingredients,” creating a catchall phrase that does little to illuminate the more basic concepts that underlie it. As a result, although a key role of scholars within an applied field is to “separate truth from hype,” the truth is that scholars have tended to characterize integration in wildly inconsistent ways that are often incompatible with the activities that occur in practice. This lack of a unitary understanding of integration, and the related inability to reliably measure and study it, has served to undermine the best efforts of practitioners and scholars to study the concept or put it into practice. Thus, there remains a compelling need to (1) better define and operationalize the integration concept and (2) advance understanding of the factors that enable companies to successfully develop and maintain integration.

Accordingly, an initial step is to develop a complete understanding of what integration entails. By clearly defining integration and its underlying dimensions, and articulating their relationship to other concepts that serve as antecedents and outcomes, this chapter seeks to provide a solid foundation for scholars and practitioners seeking clarity on this important topic.